How high this bounce goes will get tested tomorrow and Friday

10/05/2011 1:02 pm EST


Jim Jubak

Founder and Editor,

So far this is just an oversold bounce.

Know how I can tell? “News” that wouldn’t have meant anything to stock prices last week suddenly is moving stocks up. And moving them up BIG.

So the German DAX Index closed up 4.91% today and the French CAC 40 Index closed up 4.33% on “news” that European Union officials were working on a plan to boost bank capital. That’s worth 5%? Only when the technical indicators at every institutional investor on Wall Street (or the European equivalents) are flashing “over-sold” after the punishing drop in September.

The real good news today has been extremely modest. For example, Goldman Sachs raised its forecast for growth in September payrolls to 91,000 from 89,000. (Be still, my heart.)

The three big tests of this bounce—when we’ll see if this is a two day rebound or perhaps something more like the 8.5% oversold rally we got in August—will come tomorrow and Friday.

Tomorrow the European Central Bank meets. Stock market bulls are looking for the bank to reduce interest rates in response to falling growth rates in the EuroZone. Stock market pessimists think that’s unlikely with inflation popping up to a 3% annual rate in September from 2.5% rate in August. I think the financial market’s near free fall guarantees that the central bank will do something—it might be as much as an interest rate cut or as little as lengthening loans to banks to 12 months. The numbers on wholesale inflation—the Producer Price Index—released yesterday weren't particularly helpful indicators of the bank’s decision. Inflation at the producer level fell to an annual rate of 5.9% in August from 6.1% in July. But the consensus among economists had been for a drop to an annual 5.8% rate, according to Bloomberg. A rate cut would keep the bounce going. Assessing the effect of anything less leaves me trying to guess investor psychology.

Tomorrow we also get U.S. numbers on initial claims for unemployment. The consensus among economists, according to, is for 402,000 new claims for the week that ended on October 1. That would be a tick up from the 391,000 reported in the previous week.

On Friday the government reports jobs growth for September. The consensus among economists is for extremely weak growth of 60,000 net jobs in the month. But that would still be quite a relief: Remember that in August the economy produced a shocking zero, nada, nil net new jobs. That stoked fears that the U.S. economy was locked into a return to recession. 60,000 new jobs isn’t enough to lower unemployment but it might be enough to reduce fear.

And that could keep this bounce going.

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